Tuesday, November 22, 2022

Being Smart with $$ -- Big Mistake Buying Whole Life Insurance 40 Years Ago


 

Forty years ago, my dad opened a whole life insurance policy for me saying that no matter what, I’d always have some insurance.  With a $10,000 death benefit, it may not have saved my family from financial ruin if I died but the gesture was nice.  But the financial impact of this decision may have been very, very costly.  For forty years, we have paid $75 per year in premiums.  The policy has a cash value today of $4,200.  If we keep making the premium payments, which could be for roughly 25 years based on my life expectancy, it will some day pay out $10,000 to my heirs.  But what was the alternative?  If $75 per year had been added to a balanced investment account of stocks and bonds, it may have earned an annualized 7% over the last 40 years.  These annual premiums would have grown to around $15,000 today.  In 25 years when I reach my life expectancy, this money could grow to over $80,000 if it earns a similar 7% moving forward.  But I also still need to pay $75 per year to keep the policy going.  If these annual payments were instead added to the investment account, they might add another $4,700 to my value in 25 years for a total value of almost $85,000.  If I live five extra years beyond age 83, this alternate-universe account could grow to $119,000.  But the whole life policy will always pay me $10,000 at the end. Let me think for a minute which I would rather have: $10,000 or $85,000.  I will have to sleep on it.  (Critics will point out tax advantages of the insurance which is a weak argument in this case given the difference in value and the stability of the whole policy which ignores the fact that while stocks are volatile in the short run, they are not very volatility over a 40-year period.)  Be very careful of turning money over to someone with a slick sales pitch when it may be very costly to do so.  And imagine how costly this would have been for a $100,000 policy instead of a $10,000 contract.  I’ll do the math for you.  It would cost you three quarters of a million dollars.

Larry Pike, CFA

Client Priority Financial Advisors LLC
www.clientpriority.com
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clientpriority.blogspot.com

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